Last week, the Dow Jones industrial average recorded its first three-day string of triple-digit losses in over two years, and together with the S&P 500 and the Nasdaq, sank to new lows for the year. The poor performance of the stock markets has had a major impact on the annualized returns of pension funds. Fortunately, pension fund advisers have diversified their investments and are investing in real estate, which has proved to be very successful.

The New York City Employees’ Retirement System (Nycers), the city Teachers’ Retirement System (TRS), and their partner Tishman Speyer Properties were the winning bidders on April 1 for the MetLife Building. The joint venture agreed to pay $1.72 billion for the trophy building at 200 Park Ave.

In 2003, New York City Comptroller William Thompson announced that Nycers would invest up to $100 million through Tishman Speyer/Travelers NYC Real Estate Venture V, LP, in a coventure with the New York State Common Retirement Fund. The objective of the venture is to develop, redevelop, and acquire premium commercial property throughout the five boroughs.

Last week, it was announced that TMW Property Fund agreed to pay approximately $164 million for a 49% ownership interest in the Lipstick Building at 885 Third Ave. The seller is Tishman Speyer Properties, in partnership with Nycers, which purchased the 619,000-square-foot tower in March 2004 for $235 million.

Later this year, Tishman Speyer Properties, in partnership with Nycers and TRS, plans to begin construction of a 14-story, 475,000-square-foot, $200 million office tower for Citibank in Long Island City.

Alan Hevesi, the state comptroller, is administrative head and sole trustee of the Common Retirement Fund, which pools the assets of the New York State and Local Employees’ Retirement System and the Police and Fire Retirement System. In 2003,its real estate portfolio, which accounts for 3.3% of the fund’s assets, posted a return of 12.7%. The portfolio consists of assets accumulated through joint-venture relationships and real estate the fund owns outright. The fund has $1.5 billion in real estate mortgage investments, representing 1.5% of its assets, secured by a diversified commercial real estate portfolio.

The Common Retirement Fund has invested in commercial real estate throughout the state and has owned office buildings, shopping centers, and storage facilities. Under the real estate joint-venture program, the fund has acquired properties that are in need of releasing, repositioning, and upgrading. As of March 31, 2003, the Common Retirement Fund owned three office buildings in Manhattan: 111 Eighth Ave., 380 Madison Ave., and 450 Park Ave.

One success has been its purchase in 1999 of a 90% interest in the 2.1-millionsquare-foot former Port Authority Building at 111 Eighth Ave. for $153.6 million. In February 2004, it and partner Taconic Investment sold a 75% interest to the Jamestown Group for $581.3 million.

This summer, the first tenants will move into Avalon Chrystie Place at 229 Chrystie St. on the Lower East Side. The mixed-use apartment building will have 361 rental units and a 75,000-squarefoot Whole Foods Market.

In December 2003, the Common Retirement Fund invested $25 million in the first phase of the project, giving it an 80% ownership share.

The senior vice president of development at AvalonBay Communities, Fred Harris, said, “The common retirement system is a pleasure to do business with because of the sophistication of their staff and advisers and their familiarity with all aspects of the New York real estate marketplace.”

The Common Retirement Fund and Apollo Real Estate Advisors LP have jointly invested $250 million in residential and office properties, including a 104-unit condominium development at 505 Greenwich St., a 64-unit condo development at 255 Hudson St., a 200,000-squarefoot condo conversion in Brooklyn, a 200,000-square-foot condo development in Manhattan, and a 424,000-square-foot office building in Nassau County.

In October 2002, New York City’s five pension funds invested $135 million in the AFL-CIO Housing Investment Trust. Nycers and TRS contributed $50 million apiece, while the NYC Police

Pension Fund chipped in $20 million and the NYC Fire Department Pension Fund $15 million. In March 2002, the AFL-CIO Building Investment Fund invested $25.4 million, in partnership with the Dermot Organization, to develop of a 259-unit residential rental building, Hudson Crossing, at 400 W. 37th St. The development cost for the partnership was $74.3 million. In August 2004, the partnership sold the building to Equity Residential, a REIT, for $93.1 million.

The New York City Investment Fund LP was established in 2004 to pursue value-added real estate investments within the five boroughs. The fund is cosponsored by Fishers Brothers and Morgan Stanley Real Estate Fund IV, LP, an affiliate of Morgan Stanley & Company. It has $770 million in capital, including approximately $100 million in sponsor’s capital. The two other investors in the fund are the five city pension plans and the state’s Common Retirement Fund.

In the third quarter of 2004, the City Investment Fund and SL Green Realty jointly purchased the 870,000-squarefoot office building at 485 Lexington Ave. from TIAA-CREF for $225 million. SL Green has a 37.5% stake in the property; the remainder is held by the City Investment Fund and the Witkoff Group. It was the second acquisition made by the city fund and SL Green Realty. In March 2004, the partnership entered into an agreement to pay $67 million for the 292,000-square-foot office building at 19 West 44th St., between Fifth Avenue and the Avenue of the Americas.

On September 30, the City Investment Fund and RFR Holding LLC formed Wellington Tower Partners, LLC, as a holding company for Wellington Tower, a luxury residential rental building at 350 E. 82nd St. The partnership plans to convert the property into a residential condominium. On January 13, the city fund and RCG Urban American announced the acquisition of Eastchester Heights, a 1,416-unit rent-stabilized residential community in the Williams bridge section of the Bronx. In February, the City Investment Fund and the Athena Group announced the acquisition of a property at the corner of East 110th Street and Lenox Avenue. The partnership intends to develop the property into residential condominiums.

Real estate has become an accepted asset class for pension funds. Investments made by public employee pension funds have helped diversify the funds’ risks and provided excellent financial returns. Additionally, they create jobs, boosting the local economy, and provide affordable and market rate housing for the city of New York.

Based on the excellent investment returns, I expect the New York City and state retirement funds to maintain and increase their real estate investments in New York City.